The FHA is one of the largest mortgage insurers in the world. Created by congress in 1934, they’ve insured over 50 million mortgages in the nation. FHA loans are mortgages guaranteed by the Federal Housing Administration (FHA) and are typically easier to qualify for than Conventional loans. At the time of the FHA’s inception only 1 in 10 households were homeowners. America was mostly a nation of renters. Loan terms were difficult to meet for homebuyers seeking mortgages, loan terms were limited to only 50 percent of the property’s market value and repayment terms were demanding. Since its establishment, FHA loans, have helped to prop up the housing market and helped homeownership possible for many families.
The Federal Housing Administration (FHA) is part of the U.S. Department of Housing and Urban Development. They only provide mortgage insurance on loans made by FHA-approved lenders. They insure mortgages on single family homes, multifamily properties, residential care facilities, and hospitals throughout the United States and its territories.
Purchasing a Home with an FHA Loan
Here are some facts about FHA loans that can help you decide if the program is right for you.
To qualify for insurance, loans must meet certain requirements.
Lower Down Payments
They have lower down payments and are accessible to borrowers of all income levels. Down payment options are as low as 3.5%. Plus, your entire down payment, including closing costs, can be covered with gift funds.
Lower Credit Scored
An FHA loan can be ideal for first-time homebuyers or borrowers who have challenging credit. FHA mortgage insurance protects lenders against losses should a property owner fail to pay the loan. Since lenders take on less risk, they can offer more mortgages to homebuyers. FICO(R) Scores as low as 580 for certain purchase loans may be accepted.
Debt-to-Income
Your debt-to-income ratio doesn’t have to be as low as with a Conventional mortgage, and reserve funds aren’t generally required.
Mortgage Insurance Premiums (MIP)
The FHA does collect mortgage insurance premiums (MIP) from borrowers via their lenders. For conventional loans, you are often required to pay a monthly Private Mortgage Insurance of approximately 0.5-2.0% of the loan amount, but only if you make a down payment of less than 20%. With an FHA loan you are required to pay MIP no matter what. The MIPs are used to operate the FHA’s mortgage insurance programs for the benefit of future homebuyers, renters, and communities. This needs to be considered as does add to the cost of the loan. In addition to the annual premium on the loan amount, FHA loans carry an upfront premium of the total loan amount. This, of course, is the trade-off most people who would not otherwise qualify for a mortgage.
Occupancy
If you obtain an FHA loan you must certify that you will personally live in the property as your primary residence. In addition, the property must be appraised by an FHA-approved appraiser and meet property guidelines set forth by the U.S. Department of Housing and Urban Development (HUD). FHA appraisal requirements are more strict than conventional appraisal requirements.
Options with an FHA Loan
There are other types of loans that exist under the FHA program.
FHA 203(k)
FHA loans are a wonderful option if you’re purchasing an older home or a home that needs some TLC. Through the FHA 203(k) program, you can finance the cost of the upgrades through your mortgage, instead of having to pay for repairs in cash or through more expensive options like a credit card or personal loan which carry higher interest rates.
Refinancing
Refinancing with an FHA loan is also possible. If your credit is lacking, but you want to save a little money, the FHA Streamline Refinance program might be the way to go. If you’ve kept up with your current monthly payments for at least a year, you can apply for a refi without having your income, employment, or credit verified.